Eric’s book, The Lean Startup, has created a revolution in the startup world. In this episode Eric talks about how the best startups view the process of creation.
→ How the best startups view the process of creation
→ Who were the original Lean Manufacturers and what made them lean
→ What is MVP about
→ The MVP produce a prototype of the thing will take a year and $10 million
→ What is pivot
→ What are some of the possible pivots
→ His insights on how he apply the lean startup principles to marketing
→ And a whole lot more
Bronson: Welcome to another episode of Growth Hacker TV. I’m Bronson Taylor and today I have Eric Rees with us. Eric, thanks for coming on the program.
Eric: Hey, thank you.
Bronson: Absolutely. Now, Eric, you don’t really need an introduction. So for other guest need introductions, you don’t. You’re the founder of the Lean Startup Movement. I was actually telling my wife today before I came here, I said, you know, of 150 interviews I’ve done, his name or his book or his movement has probably been brought up in half of them. I was like, that’s that’s how much he’s affected the way we think about startups. You authored the book Lean Startup. You conduct a Lean Startup conference and much, much, much more. So really, from the bottom of my heart, thank you for coming on Growth Hacker TV.
Eric: Yeah, you’re very kind. Thanks for having me.
Bronson: Absolutely. All right. So let’s just jump in here. I read the book and, you know, I follow your stuff for the last couple of years, as far as I can tell, with the lean startup stuff. The genesis of it is Lean Manufacturing. That’s kind of where some of the ideas came from. So who were the original Lean Manufacturers and what made them lean? Because I feel like the more we know about the genesis, the more we can actually know about them now.
Eric: Yeah, it’s a funny thing, you know, when I talk to startup folks for whom lean means lean startup, they’re like, Why are we talking about manufacturing that are interesting? And interestingly, there’s of course a gigantic worldwide lean community on the manufacturing side. They’re like, Why are we talking about startups? So I actually I did an interview just like this yesterday with with a Lean Manufacturing podcast series. And for them, it’s like it’s a completely different set of questions and a different set of confusions, like, wait, why? What is that to do with startups? And what’s interesting about it is I have no background in manufacturing. My background is in purely in startups, in tech and software. But when I was building companies, I was using techniques that now are considered pretty commonplace because they’re part of lean startup, but at the time they didn’t have a name. Don’t people thought they were a little bit crazy? And I was struggling to explain to people, not just to show them that they work, but explain why that they why they worked. So there was a body of work around customer development and that people that the people understood that, but at least there was some stuff around that. But when we started to take these ideas into, into engineering and software engineering and software startups actually build products this way, people found it pretty confusing. And so I was lucky that I encountered this body of theory really about manufacturing called lean manufacturing. Yeah, that really helped me understand not just what these techniques are, but why they work. What is the underlying mechanism by which they work? Yeah. And so for those that are new to that, you know, I’m not familiar with any manufacturing. Most of it comes from a company called Toyota that most people know. People forget. Now, we’re used to thinking of Toyota as the world’s largest auto manufacturer. But after World War Two, it was a tiny company that made a bunch of industrial products and cars was not even their main product line. And post-World War two, Japan, the economy was terrible, capital was extremely scarce, and they were forced to compete in global market all of a sudden with true mass manufacturers like we had in the United States, like General Motors and Ford, basically running the most advanced version of the Ford production system, you know, that Henry Ford had invented in the early 20th century. And so they were put in a position where they had to figure out how do we produce the same variety and quality of cars as those mass producers when we can’t afford to set up the economies of scale and the big style factories? And they developed a series of techniques. The original people that did it are men like Taichi Ohno, who was kind of considered the father of a Toyota production system, a man named Shigeo Shingo. And a lot of people credit an American now named Edwards Deming, who went to Japan at that time and and was teaching statistical quality control. People have heard about that total quality management that those are the buzzwords from a previous century. He really was the one who who convinced the Japanese they should take this seriously. So some combination of those guys figured out this alternate way to produce stuff that when when when the rest of the world found out about it, they actually thought it was magic. And it’s hard to explain to people who’ve never been in a factory, don’t know a lot about manufacturing, why these techniques seem so magical. But the reason it’s called lean is in the old style factories, you know, you’d have a bunch of machines that produce parts and then each part goes to becomes an input for the next part.
Bronson: Mm hmm.
Eric: And you have inventory of each part to make sure that the machines were busy 24/7. So you keep a big buffer of inventory in between, and you just run every machine as fast as possible to produce as many parts as possible. And so the factories are pretty lean, were filled with extra inventory of parts that was considered an asset that the factory would have to manage and store and retrieve and all this stuff. And, you know, at the Heart of Lean was a recognition that actually work in progress. Inventory the parts that are between the stations.
Bronson: Mm hmm.
Eric: Are actually a liability, not an asset. Uh, because let’s say you find a problem in the design of a. And you have to change the way it’s made. If you have an inventory, you’ve got an inventory of a million parts. You have to throw that inventory away or wait for all those million parts to be used till the new one can come into place. Gotcha. So I’ll get to the point about start ups. I know it seems everyone I’m talking started with, they’re like, Well, why are we going on this detour, I promise, is a connection. Here’s a connection. If you use the techniques of early manufacturing, then almost like magic, the amount of inventory between stations starts to shrink and the people doing the work at each stage should get much faster feedback about whether their what they’re doing is high quality or low quality. I guess now in a startup or in a software company or any kind of high tech knowledge work, we have a problem. We have masses of work in progress inventory. But you can’t see it like in a factory.
Bronson: Mm hmm.
Eric: By every untested assumption, every design that a designer works on that has not yet been implemented. Every implementation, every piece of software that has not yet been sent through QA, that’s not yet in the customer’s hands. That’s all work in progress inventory. So now if you look at something like traditional scrum or agile development team that releases once a month, that used to be considered really fast. But now look at it through the eyes of this lean process to say how much inventory is being shipped to the customer all at once, every 30 days. It’s thousands of changes, thousands of features. Now, if there’s an error, when do you want to find out about it?
Bronson: As quick as possible.
Eric: As quick as possible. So that is the origin of a lot of the thinking around Lean Startup is to say, well, how do we apply that same manufacturing mindset around improved cycle time and driving down batch size? But to our beliefs about the customer and the thing that we need to learn in order to make our startup be successful.
Bronson: Yeah. And I’m so glad you kind of went on that detour there. You know, it’s not a detour, but it feels like it is the stuff. I know.
Eric: I know, I know. It’s history.
Bronson: There’s so much to learn from that. Just that idea of inventory, whether it’s invisible inventory or physical inventory, it’s a real inventory and it is not an asset, even though there’s.
Eric: No way of.
Bronson: Thinking about it. And if startups can get their head around that, the rest of the lean principles just kind of fall into place, that it’s really about waste. And if that’s the center of the universe, everything sort of makes sense. You know.
Eric: I appreciate you saying that. That’s how it seemed to me that like there’s a couple of critical first principles from which the rest flow. Of course. Yeah, not everybody sees it that way.
Eric: But I think what’s key is, you know, what’s exciting to me is I really thought it was important to build lean startup on a foundation of what had come before. Mm hmm. So that two things are possible. One, as lean startups grow up, you know, and I started I understood that a lot of my work today is working with companies post product market fit and companies that have had a lot of success in trying to get to traction. Those companies need not just lean startup but the traditional lean principles as well. And so we can build a lean enterprise that combines the best of both management systems, right? Lean startup for the situations of the companies that are high uncertainty, new things, you know, that kind of continuous innovation that every modern company needs, but more of a more traditional lean management program for, you know, just making the company’s regular operations more efficient, making sure that we have respect for every person that works in the production of our product and eliminating waste. As you said.
Bronson: I think it might have been O’REILLY Who said Lean can change everything. It can change government. It can change nonprofits. It can change big business, small business. And, you know, it’s odd for us because we learned about it with startups, but think about it. If it can be manufacturing, which is very dissimilar to startups, why can’t it also be government and family management and whatever else you want to make? I mean.
Eric: You know, I got since the book came out in 2011, so it’s now been about three years. The just the number of crazy applications people have put it to has been totally fascinating to see. And now you’ve named it, you know, everything from the biggest agent in the world governments, giant companies, manufacturing plants to all kinds of small and wacky things, including so much reason to write about how to use lean startup in your personal life. Yeah, but I have not. I decided not to read it. I didn’t want to know.
Bronson: You need some place for waste, right?
Eric: Oh, it’s just like I can’t. I can’t go there.
Bronson: Yeah. At some point, you just, you know, you don’t need everything to be laid. All right? So at the end of the day, what makes one startup lean and one startup not lean? Because, like you said, used to releasing once a month was really good compared to waterfall cycles. But now that’s not really great because there’s people releasing ten times a day, there’s people releasing 50 times a day. So is it just a moving target? And there’s no way to actually say that’s lean and that isn’t is it a continuum and you’re kind of somewhere on the spectrum? Or is there a dividing line that if you’re doing these things are lean and mean, these things are not? How do you see that?
Eric: You know, the one of the most importantly in principle is going all the way back to Toyota is what they call kaizen in Japan. But no matter we you call it continuous improvement and is a very important part of the mindset, which is that there really are not binary categories of lean and not lean to many people like that I encounter these days want to treat me like a religion. I get a periodic phone call. I’m not making this up to basically excommunicate somebody from the Lean movement. Someone’s like, Hey, I saw somebody doing something and I don’t agree with it and you got to make them stop. I’m like, Listen. Eric troll. Yeah. I’m not the pope. I don’t control who’s in and who’s like. These are a set of ideas that are given freely to the world. So if people are going to use them and misuse them, like I do my best to educate and convince and, you know, say what I want to say, but I don’t anyway. It’s not a religion. And so I don’t ever go around saying, that’s a lean startup, that’s not a lean startup. And I think that’s a mistake. And when we’re in a startup, it can be really tempting to say, Well, I’m not doing as good a job as that other startup, so I suck. So I should just, like, crawl up into a hole and die. And of course, startups that are savvy know that I’ll just start to feel that way. So we put out press that makes us look good and them feel bad. So like, you know, a lot of startups, I remember when I was, you know, really active as a CTO, we would have competitors that were better funded than us and just everything seemed to be going great for them, better than them. And I and I was always very confused because in the press they were the dominant player and they were killing and everything was going great. But when we would talk to customers, customers would never mention them as a competitor. I was like, That’s a little bit odd. And then I have this expression multiple times about companies like going amazing, and then one day it’s out of business, just gone like, Whoa, I thought I was doing amazing. So yeah, people are good. Certain companies are really good at putting out the impression what I call success theater. They put on a show about how good they’re doing. The only standard that matters to me in the companies that I work with, work for, invest in, is not are we doing better than competitors, better than somebody else, better than I read in a book? Are we doing better than yesterday? So are we improving in the dimensions that really matter? And and using that as your yardstick, you’ll never be satisfied. So you can never be lulled into a false sense of complacency. And also, you’ll never be doing you’ll never find yourself chasing someone who’s, like, committing fraud or doing something impossible. You’re just saying, look, our release cycles were this yesterday and here are the problems. Like if you were releasing once a month, I could name very specific problems that you have every month, practically that if you could reduce that cycle time down to two weeks would basically go away.
Bronson: Mm hmm.
Eric: And that’s true from two weeks down. And, you know, potentially you get to diminishing returns, but there is plenty of other things to work on. So, you know, we talked a lot about the importance of our cluster immune system so that your software, every bit of software company, your software could automatically detect errors and automatically revert them in the old lean system. They call this mistake proofing, making your system so easy to use that your employees can’t make a mistake even if they want it. So like the infrastructure to build such a thing is quite expensive, takes a long time, has to be built up incrementally over years. And so instead of being like, well, all they have is five year head start on their immune system and I could never get into it’s like, don’t worry about that. Yesterday you had no immune system. Today could you have something that fixes maybe one problem that makes one mistake less likely after I can incrementally improve so that today you’re better than yesterday. That to me is the standard.
Bronson: Gotcha. So it’s kaizen is continuous improvement is not in or out. It’s knocking partners up somebody else. All right. Now, you kind of mentioned earlier a lot of these ideas, you know, you put them out in a certain way in the book and then they take on a life of their own. You know, people twist them. You know, they make them do things they weren’t intended to do. They have their own philosophy around them, which is fair enough. They can do whatever they want. That’s right. I want to hear from you. I want to hear about some of these key concepts from you. So let’s start with MVP. In your words, what is an MVP? Because some people think it’s a landing page with an email capture form and anything more in your. You’re wrong. Some people think it’s much, much. I mean, we’re confused. What is it exactly?
Eric: Yeah, it’s very common. Yeah. You know, I get it. I get a lot of fan mail and hate mail about MVP and a lot of time get a lot of email people saying you have to change the term to something else. And I’m always like, Listen, if you can find a term that’s worked as well as MVP, I’m glad to switch. But there’s a reason we use this term. It’s worked and we haven’t found a better one. So yeah, look, people who well, everything they know is what the the word they haven’t actually looked it up or read the book and haven’t looked into it. They just assume they know what it means. So for those that are new to the concept, minimum viable product MVP is the smallest experiment we can do that is necessary to learn what we need to learn about the most critical assumption that will power our initiative, whatever that startup company program, whatever we’re doing. All right. So the reason why people get confused is like I’ve done this exercise with, like, tiny little app companies that, you know, where building the whole app is going to take two weeks. So the minimum viable product is, you know, basically let’s just do the smallest version of the app when you get in the store. I’ve done it with plenty of web companies where you’re an MVP. Landing page MVP is perfectly fine. But I’ve done this with industrial companies. We’re making powerplants and engines and airplane parts where the MVP is incredibly expensive. Just to produce a prototype of the thing will take a year and $10 million, and that’s totally fine. Because what matters is not are you going as fast as some crappy app? The question is, are you the fastest one? You know, there’s a if it’s a race to learn the critical things that will power your business model, then who’s going to win that race? It’s whoever is running faster was learning fastest. That’s really what MVP is about.
Bronson: So you’re telling me an MVP could take a year and $10 million in the right situation?
Eric: Of course, it’s always about what is the status quo, right? Like in that example, the company was planning the pre the pre lean plan was to spend five years and $300 million. So getting it down to a product a year instead of a product every five years is a massive improvement.
Eric: Now, if you’re an app company and you pitch me that plan, you know, I mean, it’s this vicious. So I think it’s that we have as entrepreneurs, we’re very good at talking ourselves into the belief that we’re special. And the specialness always has a particular kind of special, that the special lets us indulge whatever we really enjoy doing.
Eric: So if you like building products and, you know, not talking to customers and just being in your cave cranking out code, which I like.
Bronson: Mm hmm.
Eric: It’s very easy to convince yourself that you need to take a year or two years. Three years, you know, whatever that is. That’s pretty.
Bronson: Fun. Yeah. One thing I’ve learned is that if I’m too comfortable too often, I’m probably doing it wrong because the things that are going to work probably make me a little bit nervous and scare me a little bit and make me put in effort in ways I don’t want to. So if I’m not doing those things on a pretty regular basis, I’m almost for certain only doing what I want to, which is wrong.
Eric: I believe that.
Bronson: Yeah. All right. So that’s the MVP. And you answer my next question already, which was, is there ever a time where the MVP is not the best route and you need something more fully fledged, but it’s situation dependent and you’re comparing against the variables of yourself and yesterday and other people in your industry, not some. It has to be a landing page and that’s the mark. Totally like imagined plus loss, a real philosophy.
Eric: That’s right. And look at our whole our whole idea within started is to try to make this whole process more scientific. And when people hear the word scientific, sometimes they think, I mean rote or you’re turning into a spreadsheet, they’re making it not creative, which I think is a huge insult to the many very creative scientists who have shaped our modern world. So they want to think that screw you.
Eric: But if you go to a scientist and you went into a lab somewhere, you usually find what is the best kind of experiment. They’d be like, Well, for what? Like, I don’t want to hear. For what? No contact. The number one. Best practice. Best experiment. Like, is it in a petri dish? Is is it in a chemistry set? Is it astronaut? Like the best experiment? They’d be like, you’re a moron. You know, like, reading about an experiment is the the best, fastest, cheapest, most accurate way to get the information that you want. What are you trying to learn? And I can tell you the best experiment MVP is the same way people say, what’s the best MVP? It’s like, Well, tell me what you’re trying to learn. I’ll tell you what the MVP should look like. Yeah, but unless you’re willing to be explicit about what are you trying to learn, then you’re not doing MVP, so don’t don’t pretend.
Bronson: Yeah, I like that a lot in my mind. Just in this conversation, I’m starting to think the minimum viable experiment and the experiment might be a real product. The experiment might be talking to customers, but it’s.
Eric: A lot to.
Eric: Hey, Skype for our conversation.
Bronson: Bring get back. All right. There you go. I got you about that. All right. I’ll make a note to it right here.
Eric: Yeah, I’ll take it out and post. Fix it.
Bronson: In post. Yeah, everything’s fixed in post or I’ll just leave it and they can hear us ramble. All right. So, yeah, I mean, just hear you talk. It makes me think minimum viable experiment. And so for some reason, that clicks with me. I like that. Yeah. All right. Let me ask you about the pivot. Another one of those terms. Some people just absolutely hate it. Some people absolutely love it. Some people say it’s the reason they’re successful. Some people think it’s what’s wrong with the world. Yep. What is a pivot? Is it good? Is it bad? Is it neither? But here’s what I really want to dig into is the kinds of pivots, because I’ve seen you post before, like the ten kinds of pivots. And every time I run across that list, I need to reread it because there’s something in it that I need to think about for my own startup right then. And it just always gives me great idea, that simple list of ten things. So I write the pivot a little bit.
Eric: And I’m glad you say that. You know, it’s interesting. Startup advice is really like that. I try as an aside what you just describe that phenomenon of like reading something and having to go back and read it over and over and over again. Startup advice is really like that because everything in startup world is obvious until you’re actually in the situation and then you’re like, Wait, what am I? It’s impossible to convey in writing how confusing and just stressful and crazy things are in startup. So, I mean, I’m just talking about Steve Blank in customer development, my copy of The Four Steps to the Epiphany, which I was at the time that I was doing my startup, was really the only book on any of these topics.
Bronson: Mm hmm.
Eric: I must read that book 100 times because it would be hot chapters and sections. I’d be like, This is stupid. I don’t need this right now. And then like months later, I’d be like, Oh my God, I’m having this problem. I’m like, I’ve heard of that somewhere. I’d be like, flipping through what? Isn’t there like advice about what to do in this way? And I need it right now. So like that’s sort of advice is like that and pivots, I mean, is really where it all comes together for me. So first of all, what is it? Very simple, actually. A pivot is a change in strategy without a change in vision. So most of the things that people criticize about pivots don’t even fit that definition. So I’m like.
Bronson: Here’s a vision. It’s not a pivot.
Eric: Yeah. Did you even check? And like, some people are like every time you make any kind of change, that’s a pivot. And it’s like if you just like fix a bug in your product, that’s not a pivot. If you make your product easier to use, that’s not a pivot. Just same old product, same old strategy. But like you build a new product, congratulations. Are very proud of you. Like, I’m very glad they did it, but don’t call it a pivot. And the most recent meme I hear is people criticizing what Peter Thiel calls agnostic experimentation, which is just like instead of having a vision, you just like pivot all the time and figure out what the data will tell you, what to do. And it’s like it’s such a clear misunderstanding. It doesn’t even make sense to me. How could you even have a pivot if you have no vision? It’s just like saying you want to do science with no hypothesis. I just don’t understand. And it literally can understand what people are talking about when they when they use those, when they talk about this criticism. So. So, yeah, I think the critical thing that I say about a pivot is it requires having a vision. No vision, no pivot possible. Back to the definition now. No agnostic pivots. Yeah. So actually, does it make sense? Is it because you were like, oh said it was about speed going fast. That’s true. But if you think about acceleration, one way to accelerate really fast is to just run around in a circle and go nowhere. You’re going really fast, but you’re not getting anywhere. So speed has to be defined with respect to some destination. So a pivot is simply saying, look, we had a strategy, right? We’re trying to go we’re trying to drive from San Francisco to Chicago. And our strategy was drive do north. And I get a certain point. You’re doing your strategy and you’re like, you know what? I don’t feel like we’re getting closer to our destination. I feel like, you know, it’s he made it seem like a good idea at the time, but now he didn’t make a change in saying your route. So, you know, if you have a GPS in your car and you’ve programed in, do you want to go to Chicago and you’re going the wrong way? You can say, give me a new route, help me get there. And you, because I got to go due east for a while. But you don’t ask your GPS, Hey, what should my destination be like? Robot, can you tell me what to do? Like tell me where to go? Like you have to have a destination in mind. A pivot is just saying, look, it’s a bit. But the current strategy is not the best one to get to our destination and try something new. And I don’t know why that honestly I don’t know why that that concept should be controversial. Seems actually. Pretty straightforward, and you cannot understand the stories of startups without having this concept in your vocabulary. So I don’t feel bad about popularizing the word. It’s critical to understand that startups go through these strange gyrations where it seems like the thing that they started with and the things they ended up with have nothing in common. Mm hmm. But if you follow the pivots, you’ll see. Now they have a there’s a kernel of truth that they threaded all the way through that that only really made sense in retrospect. Yeah. And the problem is that when people become billionaires, they tend to have selective memory about the things they were wrong about in the past, and they no longer have anybody around them to tell them that anything they say is less than brilliant. Yeah. So what happens is they tend to start to rewrite their own stories, not just publicly, but in their own mind. That makes everything seem smoother and clearer and easier than it actually was. That’s just that’s just being human.
Bronson: Yeah. No. And it’s funny you mentioned billionaires. I think about how also, once you reach a certain level of success, it’s almost like you have the right to be right about everything. When you have no idea anything about that topic, you’ve never studied it. You don’t have first hand experience. It’s not been a part of your trajectory. And yet somehow now you can just talk about any subject because you’re super rich. It’s like it doesn’t work that way, but we let people get away with it.
Eric: Well, it does work that way, I think is exactly.
Bronson: The problem, and it does work that way. We let them.
Eric: Have a look. And of course, there’s tremendous wisdom to be had in studying people who’ve been successful. And I don’t mean to denigrate that, but I do think it’s important to just to ask it when you’re taking advice that that’s of the form. Look, I did this, then I was successful. Therefore, if you do that, you’ll be successful. You just think logically about it to say, How do I know that taking that advice will actually help me? Because keep in mind, most of the people giving that advice didn’t actually follow that advice themselves. Yeah, they they lived it, but they didn’t necessarily have someone who had them on the shoulder and said, by the way, do this and then it’ll work out. So like they had their own special path. And so you’ve got to really think about how do I really know that that advice will apply to me? And of course, the reason I spent so much of my last of my five years of my life is developing this theory of lean startup is I don’t I’m not trying to tell people, look, I made it and you can, too, if you just do what I did. I’m trying to say, look, here’s a theory that can help you understand the world better and make better decisions. And you should not take my word for it because it’s not a religion. You should take these ideas. Don’t take them on faith. Go test them out in your own life and see if they work for you. And if they do, maybe try a little bit more. And if they don’t, tell the rest of us so we can all get smarter.
Bronson: Yeah, absolutely. Now, tell me about some of those ten pivots. You don’t have to go through all of them, but that is they spark ideas. So what are some of the possible pivots? Just to give our viewers an idea. Sure.
Eric: The two the two that I think are the most kind of unique to a lean startup discourse you don’t see this written about very often are what I call the zoom in and the zoom out to.
Bronson: Like this.
Eric: And zoom in. Pivot is where you say, look, I have a product with ten features, but really feature number ten is the one that matters. It may not be the one that I thought mattered. You know, I think always think about people in their early days and their cryptography, you know, Palm Pilot, PDA like cryptography, crypto cash algorithm thing. And it’s just like they had like a so many features of which emailing money to somebody else was like one of the minor features they happened to have introduced. But when they saw people using it all the time, they said, You know what, let’s just forget the PDA thing. Let’s zoom in and make that one feature our whole product. Let’s see what happens. And a lot of great products people got to think of that way. You think about Google zooming in on just the search out of the portal. You know, all the kind of simplifying products out there that.
Bronson: Suburban zooms and it becomes Instagram.
Eric: Exactly right. It’s just like such a great story. Yeah. Zoom out is exactly the inverse. The opposite where you say our whole product is actually just a feature of a much bigger product. Sometimes you just realize, Oh, I see, it’s not enough just to solve this problem for somebody. You got to solve a whole suite of problems. You can’t just solve, you know, you know the organizer. You can’t just like give people a better email client, giving them a whole office suite. You can’t just you can’t just give people like a better command line. You gotta give them a whole operating system. You can’t just give people a better app. You got to give them a whole mobile phone. Mm hmm. So, like, there are those, like, those situations in in enterprise software and enterprise products are more common. It goes into the term whole product. Mm hmm. Where you say, you know, like a lot of times you have a technology, but you need to have OEMs or VARs, right? Somebody who can build the product and deploy it in your customer site for you. So you got to go partner with those folks. You need your business to get a distribution component or you know, that that’s like that’s pretty common.
Bronson: Yeah. Now, that’s a great examples. All right. So our audience here is basically obsessed with growth and marketing and, you know, those kind of things. So help us connect the dots. How can we apply the lean startup principles to marketing? How can we do the build measure, learn with marketing? How can we get rid of waste and marketing? Do you have kind of thoughts developed on that? Does it apply directly or is it nuanced with this in mind?
Eric: Yeah, I think it applies quite directly. And and. A couple of things I’ll say. First is one of the cool things about Lean Startup is that for it really helps us recognize the truth of startups, which is that the product is the marketing is the product.
Bronson: That’s deepening it.
Eric: No, functional functional divisions don’t actually make sense in startups. So just because we’re used to having an engineering department and a marketing department that do separate things doesn’t mean that actually customers see it that way. For the customer, everything that you experience is the product. Customers are incapable of of differentiating between something they saw on a website during the landing page process and the actual thing they downloaded onto their computer like. It’s all the product as far as they’re concerned. I was once working on a product where customers literally would get confused about what product they were using because we would allow competitors to advertise on our website.
Bronson: Mm hmm.
Eric: So we would sometimes get customer service complaints about the competitors products and they would get them about our customers. Were that confused about what was going on? And you just yeah. Unless you’re really inside the mind of customers, it’s hard to really understand the level of just total confusion. People generally live their lives in and so when you’re doing product marketing, you are trying to convince people that you want to make something clear that is inherently confusing. And so everything you do counts as the product. So every banner ad you run, every burning page you develop, every marketing technique, every growth hack, everything is part of the product. So that means that your marketing team, your growth team, got to have product people on it and your product teams have to have marketing people on. So that’s one thing we have to work Cross-Functionally. I think that’s a requirement. Second thing is a marketing campaign is a product. So you want to do it scientific or do you want to do it astrology style? That’s up to you. But if you want to do it scientific, you’ve got to ask yourself, what am I trying to learn with this marketing campaign?
Bronson: Mm hmm.
Eric: When we talk about growth, we tend to get very selfish and be like, I don’t care what the number is to go up into the right. Just do whatever it takes. But if you took that idea seriously, he said, I really don’t care. I just want the numbers to go up to the right. Like just do a Ponzi scheme.
Eric: Like that grows fast, right? Sell porn, right? Like, it’s pretty. Like, I’m amazed how many people, like, who start doing a B testing, like, blindly, like, wind up selling porn pretty fast. So that makes the numbers go up into the right. But is that the business you really want to be in now? So what are you really trying to learn? It’s like if I’m trying to learn how to persuade people to try my product, if that’s really what I need to do, then like doing a campaign that reaches a million people. It’s probably a bad idea because let’s say it doesn’t convince the first hundred people. How much more do I learn from the 999,900 extra people who don’t? My campaign is ineffective for right. To me, the essence of lean startup applied to marketing is systematically identifying what are our assumptions, what needs to be true in order for our marketing goals to be met?
Bronson: Mm hmm.
Eric: And then running experiment at the appropriate level of scale to figure out how to do that. So, you know, if you want to reach a million people and convince them to try your product, get 100 people to try it first. Yeah. And then figure out what did I learn from the 100? That I can apply to a thousand and apply to 10,000, I hope. Now this is starting to sound a little bit familiar to the conversation we had right at the start. Right. It’s the same thing, right? How much extra inventory do you have of untested assumptions? Right. Like all the extra people that you touch with your campaign before you figured out if it even is the right campaign or not, that’s pure waste and you should eliminate.
Bronson: That’s awesome. And you know something? You said it at some point in the last couple of years, the switch flipped in my mind, that product is not just the thing on the screen that I input information on. When I’m ready to do the thing that you promised me it’ll do. Product is every email I get from the company. Product is the conversation I have on the street about the product, or somebody’s product is just everything. Every every single point where we are making contact with a user in any way, that’s product. And maybe even beyond that, in some ways I haven’t thought of yet. And when you make that switch, all of a sudden product takes on a new life and all of a sudden MVP takes on a new life. Because now it’s not just MVP with the product lowercase P, it’s MVP in every sense of the product MVP, with the email MVP, with the marketing MVP, with the product MVP, with everything. And if you think about it that way now, our marketing campaigns have a minimal viable marketing campaign product that we need to put out and learn and then iterate on from there, right?
Eric: Yeah. The other thing I want to mention that I think is critical for your audience is we often talk about products about the value hypothesis and the growth hypothesis, like it’s not enough, in my opinion, to just test to see you do an MVP and be like, well, customers like my product, I got five customers and they like it. If I don’t have a plan for how I can turn those five customers into ten customers.
Bronson: Mm hmm.
Eric: So both. It’s not that. It’s not that either hypothesis is unimportant. It’s that you need both. One or the other is not enough. Value without growth is an art project, and growth without value is a cancer. All right.
Bronson: So you got to say both those again and slower because I feel like sure I’m really profound as me and said they’re.
Eric: Okay I guess it’s very simple like a the product that we want to test in a startup is one that has a value hypothesis and a growth hypothesis. So value hyper, if it just creates value for somebody but has no way to grow, then you can’t get any kind of impact in it. So it’s not bad. It’s just it’s an art project, right? Like a lot of people are like, I’m just want to do design for design sake and it’s like, Great, put your work in a museum. But if you’re trying to actually create impact and change the world, then that’s not enough. And growth without value, I mean, really is a cancer or a Ponzi scheme or, you know, take pick your favorite kind of runaway growth that is ultimately harmful. Right. You you remember the wave of viral apps in the early days of the Web, you know, when people figured out how to do viral address, book import, stuff like that. Yeah, there were a lot of products that existed just to perpetuate themselves and had no value and they ultimately crashed and burned. So don’t we don’t want to build those kind of products. So we want to be building a product that has both value and growth. And for marketers, I’m surprised how many marketers I work with that don’t have a theory of growth. They’re just trying to make numbers go up and to the right. And, you know, I really think that’s dangerous. Both of them are looking at what we call vanity metrics. So like total number of users, total revenue, the gross numbers, it’s like the exhaust from the engine. And the problem with using those metrics is you be like, look, it’s almost like you’re thinking like this. A car that’s going really fast is a lot of exhaust coming out. Therefore measure the amount of exhaust to figure out how fast you’re going. Now, incentivize your team to generate as much exhaust as possible. And you think about that. I know you’re like, wait a second, wouldn’t a really good way to generate a lot of exhaust if you throw some sawdust in the engine? Yeah, oh, yeah, oh, yeah. You’ll get exhaust that way. But will you get growth? Not really. So most house companies are doing this, you know, generating noise and hype and unsustainable growth to drive those numbers up. And I think that’s a bad a bad plan. Yeah.
Bronson: You mentioned needing a growth theory. What does the growth theory look like? I know it’s really difficult for everybody, but just give us some idea of the contours of a growth theory.
Eric: So so I believe in something I call sustainable growth. And sustainable growth has a simple one rule. Here’s the rule. A lot of sustainable growth. New customers come from the actions of past customers. That’s it. Mm hmm. So as long as your new customers are coming back to the past customers, then as you grow, you’ll get compounding type growth. Because the more customers you have, the more new customers you’ll have. Mm hmm. So if you think about it, I only found three theories. I call them engines of growth that match that that law. I call them sticky, paid and viral. I’ll just walk you through them quick.
Bronson: Yeah, please.
Eric: In a paid engine of growth. Easiest one to understand. You make a dollar for every customer you can. A you do customer acquisition for $0.90. Then you can take the $0.10 extra that you have left over. Save it up so you got ten and buy yourself an extra customer. There you go. So it is very simple. If customers give you enough margin to be able to afford customer acquisition and that’s scalable, then you can keep doing that over and over again. And the reinvestment will give you compounding growth effects.
Eric: And like all the engines of growth, engine of growth has only one metric that really matters, which is what is the marginal profit per customer?
Bronson: Mm hmm. Yeah, absolutely. It makes total sense. So it’s not it’s not an engine in that the individual is actually bringing another individual. It’s that they’re giving you the margin that allows you to bring in another individual.
Bronson: So from here, it’s the same it’s still growth that’s sustainable, even though they’re not actually helping us do it per se.
Eric: Exactly right. Yeah. So viral growth is more like, I think, what you had in mind. Yeah. People sometimes use viral as a synonym for word of mouth growth, but I think that’s really misleading. Viral growth happens when the product product transmission from person to person is involuntary. Right. Like a virus. You can’t be like, Oh, my town is having a horrible virus. I’m going to opt out. And that’s not how it works. Involuntary transmission. So, you know, if you use PayPal, you send somebody money. It’s almost an involuntary reflex. You get an email that’s like, hey, someone wants to give you money. Click here to collect it like that, you know, as close to 100% open. Right? Right. Like that’s viral growth. So in viral growth, new customers come from the actions of past customers because the past customers involuntarily infect their friends with the virus.
Bronson: Mm hmm.
Eric: And the one metric that matters in that situation is what’s the viral coefficient factor? I’m sure your audience is very familiar with that. Yeah. In the sticky engine of growth. That’s the domain of word of mouth. Sticky engine of growth happens when the new customers are the old customers coming back. So if you have a product with 100% retention, meaning it’s so addictive that once someone starts using it, they can’t stop.
Bronson: Mm hmm.
Eric: Now, imagine that same product had 5% a month word of mouth growth. So just as you know, it’s like TiVo, right? People just love to tell their friends about it. And, you know, if you have 100 customers and you’re going get five new customers from that.
Bronson: Mm hmm.
Eric: And that’s like having a bank account that pays you 5% interest compounded monthly. Think how rich you would be. Has also had such a big hit. Right. Now, here’s the trap. Let’s take that exact same example. Now, imagine you had 95% retention, which sounds amazing. If you have 95% retention and 5% word of mouth, you will have zero growth.
Eric: Now. Maybe you’re okay with that. Probably not, but probably not. So I meet with teams all the time that don’t have a theory of growth. They’re not. They haven’t declared a major. They haven’t said this is our growth engine. And these are the critical metrics we look at to see if the engine is turning properly. So like I’ve had a several times, you meet with a team that’s having zero growth and they’re very frustrated and they come to me saying, Hey, can you give us some customer acquisition tactics? How do I get more customers, more customers, more customers? And when we do the analysis through the sticky engine of growth lens, we say, look, you have 60% retention of your product, which sounds pretty good, but that means every month you’re losing 40% of your customers. And because you’re having no growth, you’re backfilling 40% of your customer base every month. It’s actually amazing customer acquisition. You don’t have a customer acquisition problem. You have customer retention. Brown Fix that and things will work. So Sticky Engine of growth has again one metric that matters, which is what is the net churn word of mouth minus churn, you know, on a per period basis?
Eric: The reason I think it’s so important to have one engine of growth and specialize in it is that the skills required to build a growth team around one engine of growth are specialized. Yeah, very few companies, if any, that I have ever met, can, can like walk and chew gum at the same time with this, you know, think about the companies have amazing sticky engine of growth. I always think about World of Warcraft.
Bronson: Mm hmm.
Eric: Right. Sorry. Playing World of Warcraft. Very hard to cancel. So it’s amazing. Sticky growth. Ever seen their TV ads?
Bronson: Yeah, they’re bad. What’s that?
Eric: They’re bad. It’s like Mr. T and it’s like, yeah.
Bronson: They’re like a.
Eric: Yeah, yeah. Like, you know, if you compare and add that a sticky growth company produces to like a Procter Gamble that has like paid engine of growth all the way, right? Like their lifeblood is doing this kind of advertising. I know.
Bronson: How to put an.
Eric: Ad on TV. They know what.
Bronson: It’s like to watch pharmaceutical ads with the lens of a marketer to learn. Because I’m like, they know how to make their voice have the right cadence to ignore all the side effects, and they know how to put the right thing on the screen to make you really zoom in on the benefits like they’re genius because that’s their engine of growth.
Eric: Yeah, evil genius, unfortunately. But yeah, exactly. Yeah. Right. So just so you got to really figure out, like, what am I trying to specialize in? The viral the true viral companies out there are amazing at viral growth, but like, that’s what they’re amazing at. So, you know, it’s going to be amazing. All the engines. I don’t I’ve never seen that happen. Yeah. And it’s also critical because sometimes people are pursuing an engine of growth. This goes back to the question about competition and standards.
Eric: I meet people all the time who are feeling bad because some random metric is not as good as their competitors and it should be better when it doesn’t even make sense for their business. And I’ll give you an example. There was a fad a while ago that engagement was the only metric that matter. Everyone should be measured on engagement. Retention. Is everything okay? I go to these fads periodically. Yeah. So some products really do matter what their long term engagement are, but some are not designed for long term engagement. Like a dating site. You have a dating site with long term retention. Your customers are pissed, they want a house. So so you cannot build a product for dating site using that sticky engine of growth. It doesn’t make sense. It can’t be done. You have to use the paid engine of growth. And that’s why eHarmony and all these guys are masters of advertising, because the goal is to monetize in the three months that you’re there, enough money per customer to be able to afford customer acquisition. That’s so like so so I think it’s really important. Go back, have a theory of growth. You have to have an understanding of why do you deserve to have growth?
Eric: Like why is it supposed to happen? Growth. Growth is not magic. It doesn’t just happen if you sprinkle a magic growth, no dust on it. Why do you deserve growth? What engine are you trying to make work? Then what are the key assumptions that power, that engine? And then how can we test those assumptions? Yeah, that’s why this is so critical. If you want to think lean in marketing, you’ve got to think this way. I think.
Bronson: Yeah, you know what? I think the last 10 minutes of what you shared might be some of the most important things that have been shared on growth TV. I think it’s going to be the kind of thing that if they don’t know, they need to rewind. I’m telling you, rewind it. Just keep on listening until it makes sense. Or like you said, come back when you’re ready, when you need it and it’ll make sense. That’s awesome. Thank you for doing that. I learned this since you published the book. What’s been the most important development? Has anybody move the conversation forward in a meaningful way? Has any concept been put out there that wasn’t in the book but really matters? Or was the lean stuff you wrote so fundamental that nothing’s really moved it forward in a meaningful way? You know, and you can be I mean, look, you can be it’s hard.
Eric: You know, I want to be honest, it’s hard to answer a question like that honestly, because, of course, in my mind, every good thing that’s happened since the book came out happened because the book came out, you know, including like, you know, whatever global warming is getting better because of book. Like, it’s hard to of course, it’s really hard to sell. So like there are a lot of people writing a lot of stuff about Lean and, you know. It’s hard for me to say who’s really like who’s advancing the state of the art and who’s not. Because, of course, I’m so focused on doing my work and applying the ideas and new and what I consider interesting ways I don’t always like. I just, I don’t know, maybe it maybe it’s a failing, but I don’t really have I’m not good at kind of stepping outside of my own work and being seeing what other people are doing and saying, hey. Is that advance of the conversation? I don’t know. So I don’t know how.
Bronson: You understand that.
Eric: No, no, that’s fair. Like, you know, like like the whole growth hacking movement has grown up, you know, in the era of lean startup. Sure. And, you know, I know a number of people that were involved in coining those terms and promulgating it. So like and I see what I read, growth hacking stuff. I see these bit tidbits of lean startup sprinkled in like growth engines and stuff, but I haven’t followed it closely enough to know like is that, is that just lean startup but applied in a new domain or is there something genuinely new beyond? I don’t know how to answer those questions. I leave that to to start.
Bronson: That’s fine. And honestly, I mean, I’ll answer maybe a little bit for you. I think, you know, the book, it it is very fundamental and not in a good or bad way. That’s not a judgment call on it. It’s just that it’s fundamental in that it’s fundamental, you know, some things they’re broad enough that a lot of activity can happen on top of them, but the fundamentals were there to let it happen. And so I think there is going to be a lot of people moving forward, a lot of things being done, a lot of things being said. But I think the rules of engagement, the operating system, the binary code, the kernel, however you want to say it, a lot of it is in the book. And so I think that’s why it’s hard to really differentiate the people playing on top of it, you know?
Eric: Well, that’s very that’s very kind. And look, I like I said, I really tried to build the book on the foundation of what had come before. So I am grateful to the people that build on top of this new foundation. And I, I really think that because, you know, we’re all primates at the end of the day and we have a tendency to be hierarchical and want to be like who get credit for what and who’s in charge of what, you know. And the person who came before is better than the person who came later. And I just think know that way of thinking really seems foolish to me. I think I think the way you said it is exactly right. Like, let’s just let’s celebrate that we have accomplished something together and not worry so much about who gets credit.
Bronson: For one thing, so much about Newton, you know, building on the shoulders of giants. I mean, it’s what we all do, whether we recognize it or not. So you might as well recognize it.
Eric: I know. I think that’s I think that’s exactly right. You know, I used to think that quote was really annoying as a kid. And now that I’ve lived it, I’m just like, God, it is so true. Like. Whatever we’ve accomplished. Like it’s, you know, especially when I was writing the book, I read a lot of old management books from that early 20th century, you know, for basically every decade of 20th century. I wanted to know, like, what do people think was management and how were companies built and how were the great startups of the past built? Like, like how was the Ford Motor Company built on stuff and you just. You realize there’s so much conceptual framework we take for granted? Yeah. That allows us to do truly epic things that that our ancestors, who are just as smart as us, could not have even attempted because the infrastructure wasn’t there. Just makes you profoundly humble, I think.
Bronson: Yeah, no, absolutely no. That’s great insight. All right. I have two final questions for you. These are the fun ones. And this this is a question I’ve been asking people, because the answer is always fun. I don’t know why, but what are you working on today after this interview is over? Raptors over. What do you got going on next?
Eric: Look at my calendar. I don’t know.
Bronson: Yeah. Tell us how to do it.
Eric: That’s. Let’s. All right, that’s it. Here. Well, that’s kind of depressing, so I’m not going to talk about that. I have a I have a dog that is not well. Sorry about that. I’m going to be dealing with that. But but you answer your actual question. You.
Bronson: Yeah. Work wise.
Eric: Yeah, work wise. Well, there’s two things that that I’m doing today that that maybe an interesting one. I’m trying to build a new stock exchange.
Eric: As yes. This idea called the long term stock exchange or LTC, which is to say we know that the public markets are broken and we know that the companies in them face relentless short term pressure to make bad decisions.
Eric: So and we know that there is investors who are getting suboptimal returns by taking a short term point of view. So these two trends kind of have toxic relationship with each other. You have investors trying to invest for the long term and you’ve got great companies trying to try to reinvent themselves for the next generation. And both are having a hard time. Yeah. So since we know that those two groups exist, why don’t we create a new exchange where the rules would be designed to foster and incentivize long term thinking, where we could have those two kinds of groups come together? So you have investors that actually believe in long term value creation and companies that are organized that way. And we could leave behind some of the more short term oriented aspects of today’s markets.
Bronson: All right. So probably worth its own conversation right there that we can’t get into. And I got all kinds of light bulbs going off in my head, so.
Eric: Yeah. It’s like I think the current markets are more broken than people realize. And so there’s an opportunity for disruption.
Bronson: Yeah, well, that. I mean. Yeah, let’s see what happens. Exciting. All right. So last question. What is the best advice you have for any startup that’s trying to grow? And obviously, you gave a lot of great advice already. But, you know, what do you want to part with? What’s your final words?
Eric: You know, I would go back to what we’re talking about with science and experiment. And here’s the funny thing about startups. Here’s my claim. Everything you do in a startup situation, everything you do is already an experiment. You’re running an experiment right now. You ran an experiment yesterday, and you’re going to run an experiment tomorrow. So I have to get the question like, Hey, how do I know if I should do an experiment in my startup or not? And it’s like you’re not understand. It’s not a choice. You are doing an experiment. Now, the question is, do you want to a good experiment, a scientific experiment, or a crappy, sloppy astrology style experiment? Most people in start ups are pretty science oriented. Like we tend to be science geeks, engineers, you know, like not a lot of astrology believers. Not that they don’t exist, but it’s not as common. So I get in a lot of trouble out of interest, get mad at me when they’re like, How dare you accuse me of astrology? Don’t listen if you believe you can predict the future. That’s not science. That’s astrology. Mm hmm. So if you’ve said I’ve got a five year plan, I got my plan. It says I just might just do these things. These good things are going to happen. You don’t have a basis and empirical basis to believe that. And that’s not science. And if you’re like, well, but my experience tells me by, you know, I’m an industry veteran, I know what it’s like. That’s also fine. But that’s not science. You can’t be like, Hey, I’ve got a new breakthrough about chemistry because I thought about it real hard in my experience, tells me this is going to work. You’ve got to prove it, not just to others, but to yourself. You’ve got to know what’s really going on. So you’re doing an experiment anyway. May as well make it a good one.
Bronson: Yeah. That’s awesome advice to end on. Eric, thank you again for coming on Growth, our TV pleasure.
Eric: Thank you very much.
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